Africa means never saying goodbye

I visited three African countries – Ethiopia, Rwanda, and South Africa– during my first week as Chief Economist at the World Bank in June 2008. Many visits to other African countries followed, but Ethiopia holds for me a special interest. I’ve just visited again, for a fourth time. While I am sure I will go back again after I depart the Bank on June 1 this year, this was my final visit to Africa as Chief Economist.

Over four years, I’ve seen Ethiopia gradually embrace structural transformation and its practical application. Leaders there are acutely aware that, if they are to maintain a robust growth rate (GDP growth has been around 10.5% on average over the past few years), they must move away from agriculture, the dominant sector, toward industrial upgrading and technological innovation, often by imitating economies just a few rungs up the economic ladder. Ethiopia’s agriculture sector is important and should not be neglected, but that alone won’t get the country onto a path toward middle income and finally to high income status.

I disagree with those who assert Ethiopia and other African nations of similar income level s are too burdened with governance, poverty, and poor investment climates to exit the poverty trap. China and Taiwan, China – where I am from – as well as many other newly industrialized economies were just as poor a few decades ago and equally saddled with corruption and other obstacles. Many of them still rank low in various governance and business environment indicators today. I was involved in China’s transformation away from agriculture and I’m confident a similar evolution can happen in Africa.

What’s required is what I call ‘Development Thinking 3.0,' an approach based on identifying what the country has (that is, its endowments) and what it can do well (that is, comparative advantage). As part of this, the government should play an active role in helping the private sector scale up what the country can do well now.

Development economics in the past often focused on what developing countries did not have and could not do well. One example of this was the attempt to prop up heavy industries using an import-substitution strategy based on what I call the old structuralism, or ‘Development Thinking 1.0’. This was followed by a focus on governance issues as epitomized by the neoliberal Washington Consensus – what I call ‘Development Thinking 2.0’. The fruits of Development 1.0 and 2.0 were generally disappointing.

Development Thinking 3.0 proposes a change in mindset -- we need to stop telling Africans and other low-income countries what is wrong and what needs fixing and instead work with them to identify their strengths based on what they have now. These strengths can then be turned into competiveness in the domestic and international markets.

The book finds that labor productivity in well-managed apparel, leather and other light manufacturing firms in Ethiopia is not far behind China’s and close to the same level as Vietnam’s. Ethiopia’s wages, which are the most important determinant of competitiveness for light manufacturing, are only just a fraction of China’s and Vietnam’s.

As long as the current high transaction costs due to sector-specific and firm size-related logistics, infrastructure, and business environment issues can be addressed, Ethiopia can out-compete China and Vietnam in many areas of light manufacturing. A good path to success entails developing cluster- based industrial parks.

Huajian, a shoe manufacturing firm in the Eastern Industrial Zone near Addis Ababa, which I visited just a few days ago, exemplifies my points above. The well-known footwear company, which employs 25,000 workers in China, decided to invest in Ethiopia after a visit to Addis Ababa at the invitation of Ethiopian government in October last year. Production started in January of this year and the company already has two production lines operating in the factory shell built by the company administering the zone. Currently the local operation employs 500 workers and produces two pairs of women’s shoes per worker per day, compared with 2.5 pairs per worker per day at the company’s production lines in China.

Due to poor logistics, the lead time for delivering orders is 100 days in Ethiopia compared with 60 days in China. Transportation costs are also higher. However, due to wage advantages, Huajian estimates it can reach a breakeven point when the production lines are expanded to four. The company plans to have eight production lines, employing 2,000 workers by the end of the year. The Ethiopian government has also approved Huajian’s plan to set up an industrial park with a capacity of employing 100,000 workers, which the company plans to start construction before the rainy season in June this year.

In my view, the time is ripe for Sub-Saharan Africa to move into the global light manufacturing market, since China’s current dominance is staring to erode due to steeply rising costs of land, regulatory compliance, and wages in coastal export manufacturing centers. New entrants have already begun to line up, including Bangladesh and Cambodia.

The exodus of labor-intensive manufacturing jobs out of China (as many as 85 million jobs are likely to move elsewhere) in the coming decade presents a golden opportunity for Sub-Saharan Africa to grasp. This could in turn boost private investment, growth and create millions of productive jobs.

The Ethiopian government is clearly on board. It has a Growth and Transformation Plan (GTP) covering the next four years that aims to achieve over 8 percent growth in agriculture and 20 percent growth in industry. The GTP identifies four of the five sectors highlighted in our light manufacturing report as areas meriting extra support.

Ethiopia’s aspirations are already showing results, with the now booming business in roses for export a case in point. This would not have happened without a helping hand from the government, but now I believe success will breed success.

I intend to go back soon to Africa, with a different job title, but with the same conviction that African countries can grow at eight per cent or more continuously for several decades, thus significantly reducing poverty. Indeed they may advance to middle-income or even high-income status in the span of one or two generations if national governments and the global development community together focus on how to scale up what they can do well based on what they have now.

With such a new mindset and policy orientation, the World Bank’s dream of a world free of poverty will not be too far away.

Comments

Dear Justin, your blog created an 'aha' moment for me!!
I agree with your assertion that we must find out what we do best.
For instance in the 80's the Nigerian government spent 5billion dollars on a steel mill mouthing such platitudes as" No nation ever became an industrial power without steel manufacturing. I remember thinking : "it makes no sense" because steel mills at that time even in Pittsburgh were folding up due to \competition from Japan. Of a truth government policies - bad ones have been the bane of development in Africa.
I will order you book and read it.
I am the CEO of Gasafrique, a company that wants to see LNG replace diesel all over africa, reducing thereby the cost of SBE's and ‘Light Manufacturing in Africa" as you out it.
I will like to keep you in our inner circle.
To date, we have achieved a change in government perspective by breaking down the economics of Distributed generation. The Nigerian Government now has agreed to the decentralization of power generation and LNG to doorstep could play a big role in achieving this.
We believe this LNG value chain could be replicated across Africa -especially in countries with oil reserves. Those without oil reserves could import LNG and distribute it by road to the hinterlands and created distributed generation networks which could have at the nucleus industrial parks.
I have made a few slides on this and will like to share them with you]
Best regards
Obi
[email protected]

I share your optimism. Having spent 4 weeks travelling across Ethiopia my perception of a country characterised by war, disease, hunger and corruption has changed. Definitely a country on upswing. the decisions the leaders make now will impact on the growth curve. The other big challenge is to provide opportunity to nable the large young population direct the productive efforts towards development. The infrastructure is in place, the mood of the country is upbeat now the government must act decisively and in the interest of the people. Unfortanely other countries are going backwards - Uganda, Mali, Tanzania, DRC

Then Africa should be a more critical destination for global CO2 reduction than China. There is an opportunity to help Africa develop low carbon growth. And there is a risk that Africa locks itself in a steep emission growth path.

How refreshing that a Bank mandarin can honestly assess the Bank's changing policy stance openly. The only problem with the prescription is we can't all be like China, which is not to say we shouldn't try. I am Indian but can confess to being a fan of China. However I recogniise not every country has the same context as China. China's success in industrialising out of poverty is based on a number of unique characteristics: (i) A 1000 (?) year tradition of; acceptance and dependence on strong central authority which allowed the central government to let provinces take the lead in indistrialisation 1980 onwards. This is completely absent in most African countries and South Asia where central governments are constantly under threat from local dissidents and parties. (ii) The creative and innovative transformation of this tradition of legitimate central authority into a single Party managed Nationalism which has remained a defining policy despite the radical shift from Communalism to the glories of being individually rich. (iii) The eagerness of the overseas Chinese (Taiwan and HK included), who are intensely entrepreneurial, to invest their resources back in China in collaboration with the ruling political elite. I doubt that these preconditions exist in South Asia or in Africa.
2. However I agree with Justin that the lack of good governance is not the key reason for persistent poverty. Take the case of Tanzania. More than US$ 500 million has been spent over the last 10 years on governance reforms but poverty levels (as a proportion of population)have not budged. The new buzz word is ICT which is expected to achieve wonders and every TTL worth her salt wants an ICT (especially m-governance)savy bell/whistle in their project. When will we get real?
3. Countries are not led by Donors. View Afghansitan and Pakistan. Without legitimate domestic leadership there is no hope.If we wnat rapid change (and are not lucky to be working with receptive leaders)the shortest route to pro poor national agendas is by working with the elite (not against them) on how to preserve their LONG TERM self interest which necessarily is coterminous with that of the country they manage. This requires (a) relevant context specific quality AAA (b) delivered by someone they trust (c) and with whom they have had and forsee an extended engagement (not a fly in fly out wiz kid).No government gets a McKinsey report written for itself. It is usually for consumption by external actors.
4. There is no alternative to enhancing growth since this provides opportunties for poverty reduction. We must put pro poor growth at the heart of national activities (not just in their national plans) as Justin implies using the China model. Gandhi had a simple rule. He advised decision makers to "think of the poorest person you know and how your decision will benefit that person and that will guide you on what decision you should take".
5. The Bank must not get diverted into aiming (implicitly or explicitly) for a normative political architecture. There are many others who are better at that game. Poverty is the greatest inhibitor of individual freedom. Liberating a person from poverty liberates the system in which the person operates. China has shown that. Developing counties must have uppermost in their objectives the need to fill empty bellys every night, as China does, and we are sure to see results on the ground.

Hello Justin,
You've just confirmed what I have been doing in West, South and now East Africa for the past 16 years. As a look back at what you've described and covered in your report, I say to myself I really wish the World Bank and other development entities, with so much power, will back the efforts of development professionals like myself who have championed this in a practical sense with SME's directly.
There are some issues that remain however and this cannot be ignored.
1.) An enabling environment that knows how to court FDI not only for large conglomerates but primarily for smaller businesses that provide the environmental controls, natural resource management regulatory controls and better standards for safety and quality.
2.) The development and analytics of Free Trade Zones and the best practice for achieving and enhancing these areas.
3.) Financing and Loan opportunities along with Grants and other incentive programs designed to strengthen, build and incentivize manufacturing wholly.
4.) A favorable Logistics operation for rail, road, and air cargo not only in Ethiopia but East Africa centric. If you cannot achieve rail due to CAPEX in 10 years then certainly a better infrastructure for road and improved air operations can benefit regionally and even to West and South Africa. In addition, East Africa needs to have more air-cargo shipment availability with the America's.
5.) Incentivized Logistics operations through government and the private sector that rewards efficiency, service excellence and business delivery.
5.) Better controls for all African nations to structure investment into their respective countries that does not take advantage of the local populace in land seizures and ventures that create clear and carefully constructed ethical business opportunities without abusing the rights of workers and the land they live in.
6.) A Research and Innovation Hub that is scientifically dedicated to solving developmental approaches in all sectors germane to the economic strategic advantage of each country. The innovation hub should not be research for research sake, but must implement projects to solve complex local in country and regional dynamics.
I could go on but productive ideas into action are what it’s all about for improving livelihoods.

It was interesting to following your Light manufacturing book launch in Addis. I think you will be happy to hear that earlier this week the ministry of industry has taken a step towards fully engaging the Pvt sector. the ministry summoned the business people mostly in agro-export and service sector to inform them of the untapped opportunities in light manuf. As i hear from some participants the presentation and discussion was very interesting; "it is a mouth-watering opportunity" they said. Different from what has been highlighted on the survey, that logistic and infrastructural issues will be the biggest constraints to LM, they told me that the main concerns is accessing basic resources like LAND and FINANCE. And to my surprise most of these business really want to take the leap to manuf. anyhow, your work help to draw attention only to light but to the manufacturing sector as whole.
Thanks for the exclusive interview!!!!

Its clear from your Ethiopian Experience that leadership can make a difference and indeed, perhaps the major difference in economic, particularly, industrial development .Justin, its clear that you have consciously avoided West Africa in your African travels perhaps leaders here pretend to know all the answers and will not listen to different perspectives on economic development or the best way to go about it.They are all busy doing what those before them know how to do best --- looking for raw materials to haul to Europe without adding any value.We will be interested in engaging effectively with those who share your views and wish to approach the next level of value adding investment with West African genuine entrepreneurs in the manufacturing sector .We have capacity to collaborate in the Agro -Allied manufacturing sector i.e Shoe making ,CLOTHING and related sectors in preparation for Chinese gradual exit . Your optimism is well grounded and Africa can indeed be saved by genuinely patriotic and productive private sector leaders as some of the current crop of political leaders are part of the problem and at best creator of underdevelopment economic policies.

It’s very interesting to see how international institutions such as the World Bank are quickly breaking away from neoliberal market fundamentalism. The paradigm shift from the generally applied notions dubbed by Justin Yifu Lin as “development thinking 1.0 and 2.0” which brought about an essential practice of case by case contextual analysis and development thinking is critical in ensuring sustainable development.
The successive economic growth of the past few years in Ethiopia was mainly based on improving the productivity of subsistent farmers. It’s also important to see this in light of the arguments in development economics on intensive verses extensive farming, and balance and unbalanced growth strategies.
On another note, Ethiopia and other African countries have also made significant progresses in building their Social Overhead Capital (SOC) and in building industry ready societies over the past few years.
Regional integration and the gradual growth of intra-African trade can further speed up the growth of these African countries.
Many are the factors that are in favor of these African countries, so long as they can properly understand their comparative advantages. And this requires superior analytical skill.
World Bank’s and UNIDOs “Cluster and Network Development Program” can also be of great use for countries such as Ethiopia in their journey to shift from agriculture led economy to industry led economy over the coming several years.
I’ll be looking forward to read Justin Yifu Lin’s book.

Dear Justin
As an Ethiopian I find hard to swallow what you wrote about the country. Ethiopia's growth mantra is much of a hype than facts on the ground would depict. Imagine, Ethiopia is a country that gets 3 billion dollar of aid money every year. The regime has been in power for the last 20 years, the country's GDP per capita stands where it was 20 years ago. 20 years ago, even during the time of the dictatorial military regime, the people were able to eat at least two times per day, now after 20 years of WB's aid, the people are unable to eat once in a day. In christain Ethiopia theft is an abomination, now corruption has turned to be a national culture. You may see skyscrapers in Addis Abeba, but they are owned by the ruling elites, army officers and their affilates. 7 million Ethiopia's are yet under safety net program, which is largely funded by the WB, and 4 million people need urgent food aid.
Ethiopia in Addis Abeba and Ethiopia outside of Addis Abeba are different. The government beautifies Addis Abeba to dupe the foreigners that the country is growing, but 100 kms outside the capital every thing is different. Ethiopia is a country where human rights violation is so rampant, and I don't blame you if you down grade the value of freedom and democracy for development as you were born and raised in China, but for the sake of comparison imagine Libya before Ghadafi. It was a rich and well built country, but the country turned to ruins in just a year. China's fate won't be different from Libya's and Ethiopia's will be worse. We Ethiopians need to have a stable government first before we think of any kind of development. Once we establish our government based on free election, it won't be difficult to change the country for good. The world bank needs to hear the cry of Ethiopians, freedom first . Freedom bakes bread not the other way.